Tax injustice and offshore finance
By Paul Sutton
At the beginning of April 2016 the International Consortium of Investigative Journalists (ICIJ) revealed that for more than a year they had been analysing a ‘treasure trove’ of 11.5 million leaked documents from a Panamanian firm which had facilitated money laundering, tax evasion, sanctions busting and other financial chicanery on a massive scale.
The records covered activity from 1977 to the end of 2015 and listed more than 214,000 entities including companies, foundations and trusts seeking to financially benefit from secrecy on tax affairs, frequently through the creation of shell companies, many of which were registered in the British Virgin Islands (BVI), an offshore financial centre in the Caribbean and an overseas territory of the United Kingdom.
In its initial release of information the ICIJ identified 12 current or former heads of state and government as financial beneficiaries along with more than 60 relatives and associates of heads of state and other politicians. Within a week the controversy had also ensnared former Prime Minister, David Cameron.
The Panama Papers revealed that David Cameron’s late father, a wealthy stockbroker, had established a company, Blairmore Holdings, which Mossack Fonseca, the Panamanian company at the centre of the leaks, had established for him. The company, set up in 1982, was administered through intermediaries in the Bahamas and paid no tax in the United Kingdom on its profits. It is now registered in Ireland, which has a lower corporation tax rate than the UK, and was valued at over £25 million.
When details of this company were first revealed an official in Downing Street claimed that this was “a private matter”. The following day Cameron was directly asked whether he had “derived any benefit in the past” or would do so in the future from Blairmore Holdings. His reply, that he did not have any money in offshore trusts or funds, was judged as “evasive” (the Guardian, 5 April 2016) since he did not reveal whether he had benefitted in the past or other members of his family had done so or continued to do so.
As a result press speculation continued along with calls for more transparency. Finally after further prevarication Cameron stated he would release his tax returns. He provided a summary on April 10. This revealed that he had in the past benefitted from Blairmore Holdings, selling his and his wife’s holding in it in 2010 for £31,000 making a non-taxed profit of £19,000. Other sources of income were listed for six years from 2009/10 to 2014/15. In the last year this amounted to £200,307 derived from his salary as prime minister, rental income, expenses given to him by the Conservative party and interest on deposits (Sunday Times, April 10 2016).
He also listed a legacy from his father of £300,000 and a £200,000 gift from his mother. His father’s fortune was estimated at £10 million in the year before he died and his will detailed UK-held assets valued at £2.74 million.
As Adam Boulton, a columnist on the Sunday Times remarked that same day: “So now we have confirmation of what we knew already and has never been denied. David Cameron is a wealthy man, or ‘rich bastard’ as one commentator put it nonchalantly, from a wealthy family”.
The Swiss Papers
While the Panama Papers have proved to be the largest leak so far on the secret world of offshore finance it has not been the first.
Nine years ago the existence of another set of documents was revealed. They had been leaked to the French authorities and involved the activities of HSBC’s private Swiss bank in facilitating tax evasion. The UK obtained the details in 2010 which identified 3,600 UK individuals, many who enjoyed special tax privileges via non-domicile status.
In an appearance before the House of Commons Public Accounts Committee on 12 February 2015, Lin Homer, chief executive of HMRC, was accused by Margaret Hodge, the chairwoman, of a “pathetic response” to the material contained in the HSBC leak which had been on HMRC files for five years.
Only one third of cases had been seriously pursued and only one person had been successfully prosecuted. Hodge commented that it sent “a terrible message to British taxpayers”, conveying the impression that tax evaders could hide money abroad with no real risk of prosecution (BBC News, 12 February 2015).
Attempts at the same time to bring Lord Green, a Conservative peer and former trade minister from 2010-2013, before two committees of the House of Commons to face questions on his role in HSBC, were blocked by Conservative MPs.
Lord Green had been chief executive and then chairman of HSBC from 2003 to 2010. He joined the board in 1998 “when he was given responsibility for overseeing private banking” and “the Geneva subsidiary, which routinely allowed clients to withdraw ‘bricks’ of cash, held accounts for drug dealers and colluded with wealthy clients to conceal undeclared ‘black accounts’, was created while Green was in charge” (the Guardian, 9 March 2015).
The current HSBC chief executive, Stuart Gulliver, however was questioned. The files revealed that he had sheltered £5 million at a Panamanian firm with his Swiss HSBC account. They also showed that he was domiciled in Hong Kong for tax purposes despite being a UK resident.
He need not have worried too much though as in January this year the Financial Conduct Authority, which regulates finance in the UK, stated that it would not be pursuing HSBC for facilitating tax evasion as revealed in the Swiss Papers. Coincidentally and shortly after HSBC confirmed that it would be maintaining its headquarters in London and not moving them to Hong Kong as had been rumoured.
These examples show that David Cameron was not alone or even anywhere near the pinnacle of so-called high net worth individuals who routinely benefit from the established system of offshore finance tolerated by the tax authorities and Conservative politicians in the UK. These people remain shadowy and elusive, networked into the system, and guarded by a politically crafted secrecy that is only occasionally breached.
The Luxembourg Papers
They are joined by many of the world’s largest multinational corporations who benefit from aggressive tax avoidance schemes funnelled through Luxembourg, a tax haven, and designed to drastically minimize tax on their global profits. These have saved them billions of dollars in tax and delivered an effective tax rate in some instances of only one per cent. Amazon’s tax arrangements in Luxembourg allowed them to have an average tax rate of 5.3% on overseas income 2007-11.
An investigation of these activities has been carried out by the ICIJ using files leaked to them in 2014 by employees of major accounting firm PricewaterhouseCoopers (PWC), who advised clients on such tax minimizing strategies. The key findings as reported on the ICIJ website (www.icij.org) reveal that some 340 companies have put in place secret deals with Luxembourg to drastically reduce their tax. Among them were Pepsi, IKEA, and Deutsche Bank to which a later set of leaked papers added Walt Disney and Koch Industries among others.
As part of this process PWC obtained between 2002-10 at least 548 tax rulings for multinational clients in Luxembourg featuring complex financial structures that delivered huge tax reductions. In 2013 it had no less than 2,300 employees in Luxembourg and planned to add 600 more in 2014.The three other major international accountancy firms of Ernst and Young, Deloitte and KPMG have also been involved in securing such deals.
Much of this activity took place when Jean-Claude Junker was prime minister of Luxembourg. He is now president of the European Commission. In his new role he promised in a speech in July 2014 that he would “fight tax evasion and tax dumping….We will try to put some morality, some ethics into the European tax landscape”. But as the ICIJ also observed he had recently spoken on German television where he stated: “No one has ever been able to make a convincing and thorough case to me that Luxembourg is a tax haven. Luxembourg employs tax rules that are in full accordance with European law”.
The Failure of Regulation
This comment precisely exposes the problems of regulation of offshore activity, much of which remains on the borderline of legality and is inadequate to the task.
In 2008-9 the G8 and then the G20 committed to develop ways to combat tax evasion and fraud. The Organisation of Economic Cooperation and Development (OECD) were charged with developing measures to facilitate this goal. But as the head of tax policy in the OECD reported in an interview with Le Monde (7 November 2014), not much progress had been made. In his opinion: “Change to the international tax regime will only happen with strong political support. It is simply not acceptable that large multinationals can take advantage of the weaknesses in current rules to reduce their tax burden when at the same time other taxpayers face growing burdens they cannot avoid”.
Such political will has not been forthcoming. While both Cameron and Osborne have both stated on many occasions that they would crack down on tax evasion and aggressive tax avoidance the reality has been rather different.
Cameron, for example, was recently shown to have personally intervened to try to prevent EU transparency rules being applied to offshore tax trusts. In a letter to then European Council president Herman von Rompuy in 2013 Cameron argued for trusts to be treated differently from companies, seeking for them to be exempted from entry on a register of beneficial interest which was being developed to force companies to reveal who ultimately gains financially from them (Independent, 7 April 2016).
George Osborne was accused of making a ‘sweetheart’ deal with Google that raised £130 million in back tax when, in line with action being taken in France and Italy, much more could have been claimed. The deal covered a decade of underpayment of tax in the UK but represented an effective tax rate of only 3% when corporation tax was chargeable at 20% (the Guardian, 26 January 2016).
This generosity has now been further compounded by a policy paper drawn up by HMRC and released in March. This allows a non-resident company that sells over the internet in the UK to book the revenue it earns in the UK outside the UK and so avoid tax on profits. Using such measures Google in 2012 had paid only £11.6 million in corporation tax despite generating £3.4 billion of business in the UK. In 2015 Microsoft paid only £16.9 million in tax on £2.3 billion earned in the UK (Sunday Times, 19 June 2016). These practices will now continue despite Osborne introducing a so called diverted profits tax in April 2016 designed to discourage such activity.
These and other examples show that taxation policy by multinationals and high net worth individuals is in essence ‘voluntary’.
In consequence inequality grows and the offshore sector grows ever larger. The wealth of the richest 62 individuals, estimated in 2015 to be the same as the 3.6 billion who constitute the poorest half of the world’s population, rose by more than a trillion dollars since 2010 while the wealth of the poorest half fell by the same amount in the same period (www.oxfam.org.uk).
And offshore centres are now said to contain between $21-32 trillion of private financial wealth, with an estimate that individuals from the UK held at least $284 billion offshore. The consequent loss in UK tax revenues is more than $8 billion a year.
Losses in revenue from multinationals escaping tax have recently been estimated at $600 billion globally, with developing countries hit the hardest (ibid).
The City of London
A revealing statistic by Channel 4 News stated that half the homes in Grosvenor Crescent, the most expensive street in London, were registered to tax havens. Their owners no doubt benefitted from the services of the City of London just over a mile away. It has been the major player in developing, marketing, benefitting from and politically protecting offshore financial centres in the British Overseas Territories and the Crown Dependencies.
The details of its involvement were set out in The Socialist Correspondent (No.17, February 2013). This likened the City of London to a ‘spider’s web’: “a layered hub-and-spoke array of tax havens centred on the City of London which gives the City of London a truly global reach”. Together the City and these various territories account for nearly 25% of the global market in offshore financial services.
At the heart of these arrangements is financial secrecy. The Tax Justice Network (TJN), the leading global authority on tax evasion, recently constructed a Financial Secrecy Index (FSI) ranking over one hundred countries and territories according to their secrecy and the scale of their offshore activities. Added together, the City plus the Overseas Territories plus the Crown Dependencies, stand at the top of the FSI by a large margin, with Switzerland in second place (www.financialsecrecyindex.com).
TJN comments: “In identifying the most important providers of international financial secrecy, the FSI reveals that traditional stereotypes of tax havens are misconceived. The world’s most important providers of financial secrecy harbouring looted assets are mostly not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest countries. Rich OECD member countries and their satellites are the main recipients of or conduits for these illicit flows”.
Of course, there are Caribbean palm-fringed islands in the UK case but more importantly there is the City of London. Without action against it any attempt to weaken or end offshore finance will fail.
OXFAM recognises this and sets out recommendations for action in a recent detailed study Ending the Era of Tax Havens (14 March 2016). They specify action the UK government should take unilaterally. A few very modest steps have been taken or promised to deliver corporate transparency, but as OXFAM also notes: “at the same time, the UK has taken a number of unwelcome steps – some with potentially deep costs for the world’s poorest countries”.
This is in no way surprising. Recent UK governments have bent over backwards to preserve and protect the City of London. All have been complicit, New Labour as much as Conservative. And this trend looks set to continue given the core role the City plays in global finance capital.
It gives it a win-win scenario whatever happens. Brexit is simply the most recent example. Although it is true that most multinational banks and finance corporations favoured a vote to remain in the European Union, not all did, especially some large hedge funds. Additionally, some of the most prominent leaders of the Leave campaign have close links to the City and saw it as an opportunity to reduce EU regulation on finance and go further down the road of a low tax and low regulation economy once the UK was out of the EU.
In the view of the TJN: “The UK already suffers a ‘finance curse’ from its disproportionate financial sector, which exerts unhealthy political influence and needlessly exacerbates inequalities across the country. An isolated post-Brexit UK would be much less able to resist the tax haven race to the bottom – and that would likely unbalance the economy further, making it even more reliant on this highly volatile and footloose sector, driving inequality even higher” (www.taxjustice.net).
The dominance of the City of London distorts the UK economy and underpins global finance capital. It is not easy to see how it can be cut down to size short of the end of global finance capitalism itself.
In the meantime a better understanding of the City of London is vital to an understanding of the dominance of finance capital today. The OXFAM report recommended that the UK government “should mandate an independent, fully public review of the functioning and operations of the City of London Corporation” (OXFAM, 14 March 2016). This is a start and must be supported in the interests of the vast majority in the UK and beyond for who the City of London is not the bonus it is so often touted to be but a burden and a brake on progress.
"Recent UK governments have bent over backwards to preserve and protect the City of London. All have been complicit, New Labour as much as Conservative. And this trend looks set to continue given the core role the City plays in global finance capital."